Heard about this indicator on National Radio Morning Report programme this morning and is another variable that can be useful to gauge the state of the economy. The ANZ Truckometer is a set of two economic indicators derived using traffic volume data from around the country. Traffic flows are a real-time and real-world proxy for economic activity –particularly for the New Zealand economy, where a large proportion of freight is moved by road. It represents an extremely timely barometer of economic momentum. The ANZ Heavy Traffic Index shows a strong contemporaneous relationship to GDP, while the ANZ Light Traffic Index has a six month lead on activity as measured by GDP. Notice the change around 2007/08 with the GFC.
Here is graph from a presentation at the University of Waikato Teachers Day. It shows the milk volume, the profit, and the risk involved. Notice the minimum risk and maximum profit points as well as a social optimum
Grant Cleland in the November Monthly Economic Review focused on the Tourism Industry in New Zealand. Here are some figures which outline its importance to the New Zealand economy.
The direct value-added contribution to GDP of the tourism industry was $7,250 million in the year ended March 2013, or approximately 3.7 percent of GDP. When the indirect value-added effects* of $9,805 million are included, the total contribution of the tourism industry was 8.7 percent of GDP. The contribution of the tourism industry to GDP (including both direct and indirect contributions) peaked at 9.9 percent in the year ended March 2003.
International tourism expenditure in the year ended March 2013 contributed 16.1 percent of New Zealand’s export receipts of both goods and services for that year. As such, it is one of New Zealand’s largest export earners. Statistics New Zealand ranked international tourism export receipts second in terms of export value, behind dairy products (including casein) which had exports totaling $12,349 million in the year ended March 2013. Meat and meat product exports equaled $5,279 million in the March year.
* these are the intermediate purchases of the ‘accommodation’ and ‘cafes and restaurants’ industries include items such as electricity, bedding, and food purchased from other industries or imports. Source: Statistics New Zealand.
Here are some charts and commentary from the BNZ which are particularly useful for New Zealand Trade and the potential growth of the agricultural sector.
NZ’s most significant exports to China are dairy products (39% of total), forestry (24%), tourism (12%), and meat (10%). With the possible exception of forestry, all of these sectors stand to benefit from ongoing urbanisation in China, the continued rise of the middle class, and rising household income and consumption levels. Not only is Chinese demand expected to strengthen further, but domestic production in many cases will fall well short of consumption. Exports from NZ will have a big opportunity in helping make up the shortfall.
Chinese protein demand soaring
There is a strong and well proven link between rising incomes and changes in diet (see chart below). The gradual westernisation of the Chinese diet has seen per- capita consumption of protein soar over the past decade or so. In contrast, per capita consumption of traditional foods such as rice is in decline.
Urbanisation has further stepped up Chinese demand for protein. Compared with the less diversified diets of rural communities, city dwellers have a varied diet richer in animal proteins and fats, and characterised by higher consumption of meat, poultry, milk and other dairy products.
Data from the Chinese National Bureau of Statistics shows per capita consumption of dairy products (excluding butter) has climbed from 7kg/person in 1992 to 20kg/person in 2012. Meat consumption has risen from 13kg/person to 23kg/person over the same period.
Per capita protein consumption for urban households is roughly three times that of rural households.
Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep blowing up bridges and build cities that nobody lives in at some point it becomes unsustainable. Furthermore since the global financial crisis economies have increased protectionist policies to look after their own economy. Therefore the Chinese government need to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG:
GDP = C↑+ I↓+ G + (X-M)
The chart below from the BNZ shows that Consumption ( C ) accounts for just 35% of the Chinese economy which is significantly below what is apparent in the developed world. Domestic Consumption in the US economy is over 70% of GDP. It will take many years for China to get near this level of consumption.
The New Zealand General Social Survey of 2012 showed some interesting facts regarding wellbeing:
An estimated 87 percent of people were ‘satisfied’ or ‘very satisfied’ with their lives overall.
Four aspects of life were important in determining people’s overall life satisfaction: health, money, relationships, and housing.
In 2012 an estimated:
* 60 percent of New Zealanders rated their health as ‘excellent’ or ‘very good’
* 52 percent had ‘more than enough’ or ‘enough’ money to meet their everyday needs
* 69 percent had not felt lonely in the last four weeks
* 67 percent had no major problems with the house or flat they lived in.
- 21 percent of New Zealanders had good outcomes in all four of these (ie excellent or very good health, more than enough or enough money, never felt lonely, and no major housing problems).
- 98 percent of those with four good outcomes were satisfied or very satisfied with their lives overall.
- 5.4 percent of New Zealanders did not have a good outcome in any of the four aspects of life. Of these people, 56 percent were satisfied or very satisfied with their lives overall.
The BNZ Markets Outlook reported an annualised increase in net immigration by 33,000 the highest since 2003. The boost mainly comes from the fall in migrant departures. This will impact on aggregate demand and the RBNZ have talked in monetary policy statements about increases in potential growth (like the housing market) and the impact it will have on a tightening of monetary policy later next year – remember also the Christchurch rebuild.
Bayleys Real Estate Country magazine included an article on the outlook for New Zealand’s agricultural sector which was written by NZX Agrifax.
With regard to the Dairy Industry the effect of the drought in the latter part of 2012/13 season slowed production. This was also the case with other countries as the domestic market seems to have absorbed their output. So this lack of supply combined with a steady growth on demand has resulted in high dairy prices for a sustained period of time. With prices remaining high there is now the chance that milk production will increase especially in the US where their elasticity of supply of milk is fairly elastic. New Zealand is forecast to have a good milk production season as pastures have recovered from the drought. See graph below for forecasted milk prices.
The recovery in lamb prices has mainly been down to the increasing demand from the Chinese market. During the first 10 months of the season, over 80,000 tonnes of lamb was exported there which accounts for 29% of NZ’s total lamb exports. That’s up from 44,000 tonnes over the same period last year. There has been in particular an increase in demand for higher value items such as legs and shoulders. This led to an increase in price as supplies to traditional markets was now reduced.
From the WSJ News Graphics. There has been a big increase in borrowing by old Koreans to open fried chicken restaurants.
The Korean government is trying to slow the growth of chicken restaurants—which tripled to 36,000 over the past 10 years—amid concern about the rising household debt burden, which is seen as a drag on economic growth. While it is unlikely a burst fried chicken bubble alone would take down Korea’s financial system, a sharp rise in defaults would damp consumer spending and make banks reluctant to lend. Gross domestic product grew just 2% last year, its slowest rate since the 2009 financial crisis, partly as a result of poor domestic demand on top of weaker demand for Korean exports. WSJ 14th September.
Here is a graphic that summarises production possibility curves. Usually the second multiple-choice question in the AS paper.
Just covering Developing Economies with my A2 class and I came across this in a publication from HSBC entitled “The World in 2050”. They look at what variables generate economic growth and they discuss democracy.
The success of democratic systems is most likely explained by the freedom of speech and creativity that leads to successful entrepreneurs. In addition, they provide checks and balances to ensure governments do not become excessively powerful, absorbing any improvement in the country’s prosperity for their own benefit. Democracy, therefore, is highly correlated with the measure of rule of law – see below.
But there are authoritarian regimes, such as China and Saudi Arabia, that have delivered a good ‘rule of law’. In parts of Latin America, democracy has done little to improve rule of law. Even in highly democratic systems you can still see corruption. Research showed that too much democracy was not necessarily a good thing for economic growth (of course, it may be the best model for social development). At very high levels of democracy, income redistribution becomes a dominant force, which serves to restrain entrepreneurial endeavour. And democracy places a disproportionate weight on winning current votes, potentially at the expense of future votes and therefore can hinder the investment required for long-term development.
Fed Chair Ben Bernanke recently testified before the House of Representatives Committee on Financial Services and acknowledged the troubling employment conditions. Unemployment rate at 7.6% remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high. Bernanke indicated that he would continue quantitative easing because of the unemployment figures but this method doesn’t seem to be working when you consider the lack of job growth – see graph. The U.S. Federal Reserve is currently purchasing US$85 billion of agency mortgage-backed securities and Treasury securities each month as part of its quantitative easing programme. This programme places downward pressure on long-term interest rates, and is intended to promote economic activity. However the S&P* earnings per share (eps) has grown above 70% since the bottom of the last cycle but job growth has been under 5%.
*The S&P 500® is widely regarded as the best single gauge of large cap U.S. equities. There is over USD 5.58 trillion benchmarked to the index, with index assets comprising approximately USD 1.3 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalisation.
Below is a graph showing the annual % change in lending in New Zealand by Households, Agriculture and Business. It shows that after 2003 household and business lending increased quite markedly whilst agriculture remained fairly consistent up to 2008. With the onslaught of the GFC, business and household lending reduced dramatically – the business sector lending in 2010 was negative 10% – but it took a further 2 years before the agricultural sector was affected. After 2011 all sectors have had positive changes in their lending – agriculture just ahead of households.
- 35% of New Zealand’s GDP was generated in the Auckland region – see graph below
- 14.2% was generated by Wellington
- 78% of GDP was generated by the North Island
- Taranaki had the highest GDP per person – $73,223 – forestry, fishing, mining, electricity, gas, water and waste services industry contributes almost 41% towards the Taranaki region’s economy, versus 6.7% nationally
- Wellington region ($55,791 per person), and the Auckland region ($45,709 per person)
- The lowest GDP per person was in Gisborne region – $30,450 per person. National average – $43,660 per person
This year saw an all German final in the European Champions League with Bayern Munich defeating Borussia Dortmund 2-1 at Wembly Stadium in London. In order to get to the final both teams beat Spanish counterparts – Real Madrid and Barcelona. What is fitting is that in economic terms German is the powerhouse of the European economy whilst in contrast Spain has suffered greatly from the euro crisis and austerity measures that have been imposed on it. If you look at post-war Germany you can see some correlation between the success of the national side and state of the economy.
The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley last month, 17 were from outside Germany.
Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.
Interesting post on the Credit Writedowns site by Aussie economist Steve Keen in which he explains why America has gone through ‘the Great Moderation’ since 2008. Below is a very good graph to justify his statement and part of his post.
the Great Moderation occured because Americans borrowed up big from 1993 till 2008, increasing private debt from $10 trillion to $40 trillion when GDP rose from $6 trillion to $14 trillion. It’s also why ‘the Great Recession’ occurred – because when Americans stopped borrowing and instead started to reduce their debt, demand (for both goods and services and assets like houses and shares) collapsed.
So contra Bernanke’s belief that the aggregate level of private debt doesn’t matter, it matters a great deal. That in turn means that Americans are very unlikely to spend more because of QE, because they’re already straining under a level of private debt that is unprecedented – even after several years of deleveraging, the level of private debt compared to GDP is higher than it ever was during the Great Depression.
One cannot underestimate the importance of copper to the Chilean economy. Copper provides 20% of Chile’s GDP and makes up 60% of its exports. Chile’s economy is growing at approximately 6% per year while inflation is at 1% and unemployment 6.4%. Although Chile does have a productive agricultural sector and tourism, the price of copper does have a significant impact on the economy.
Chile has done very well out of the shift of China’s rural population to the more urban areas – new homes with copper wire and pipes are needed. Furthermore Emerging markets everywhere are using vast amounts of copper to put in bridges, cars, fridges and more or less anything that uses electricity. However China’s recent slowdown has caused copper prices to slide by 15% since the beginning of the year.
The Economist reported that in 2000-05 the government’s income from mining averaged $2.1 billion a year. As Chinese growth accelerated, that rose to $11.5 billion a year between 2005 and 2011. But the boom owed almost everything to the copper price. Chile’s output of the red metal has hardly grown in a decade.
The biggest threat to Chile’s copper boom comes from China. If the country that buys 40% of the world’s copper slows further, the price of the metal will fall again and Chile will have rely on something else. Is this another resource curse waiting to happen? Below is a short report from AlJazeerah which also looks at the positives from lower copper prices – lower currency value, the peso, and ultimately more competitive exports.
Here is a new four part series from Aljazeera. After centuries of western dominance, the world’s centre of economic and political weight is shifting eastward. In just 30 years, China has risen from long-standing poverty to being the second largest economy in the world – faster than any other country in history. Part four below entitled “Made in China” focuses on China’s economic role in the world is growing at a record pace, and it is also now a key player in world politics. The country has no doubt become a global manufacturing giant, but how will it deal with issues on the home front such as increase in pollution and water shortages? Although it has been confronted with tough environmental problems, efforts are being made to solve these. To view other episodes click the link – China Rising
The BNZ publish a report entitled “NZ at a Glance” which summarises the current state of the NZ economy. Here are some of the main points:
GDP – Construction is the main driver of growth over the next couple of years – mainly residential. Net exports is likely to take a hit as import penetration starts to build with as the economy recovers. GDP is forecast to increase to 3.6% in 2014 from 2.9% in 2013.
Unemployment – the current rate is 6.2% and the labour market is tightening with the increase in economic activity. Forecast to fall to 5.2% by March 2015. Tighter labour market will mean higher wage growth but also because of higher inflationary expectations as the economy recovers.
Inflation - quite subdued and the annual rate has been 1% or less over the last four quarters. A strong NZD, weakening commodity prices and low inflation globally are conspiring to offset domestic-demand driven price increases. Low inflation also becomes self-fulfilling to the extent that it moderates inflation expectations and price-setting behaviour elsewhere.
Current Account - The current account deficit appears to be stabilising in a 4.0% to 5.0% of GDP range. This is thanks largely to a resurgence in the commodity prices of the goods that New Zealand exports. This is a welcome development to the extent that it may appease nervous rating agencies for a year or so.
The New Zealand economic expansion is gaining in momentum. The rebuild of Christchurch is now building up a head of steam and this is supporting increasingly widespread confidence. Very low interest rates and a booming housing market are playing their part too. Eventually this will necessitate a response from the central bank but while annual inflation remains below 1.0% (and set to stay there for a while) it suggests that any such response might be some time in coming. Meanwhile, the NZD remains supported by money printing elsewhere and the relative strength of the economy here.
In the NYT it was stated that Moody’s are predicting that a tighter fiscal policy – cuts in government spending and increased taxation – will slow economic growth for 2013 by about 1.2 percentage points and prevent the unemployment rate from falling to 6.1 percent by the end of the year. Where is the effect of QE on these figures?